By Seyoon Kim
Sept. 10 (Bloomberg) -- South Korea’s central bank kept its benchmark interest rate unchanged at a record low for a seventh month as it gauges signs of recovery in the nation’s economy.
Governor Lee Seong Tae left the seven-day repurchase rate at 2 percent in Seoul today, as forecast by all 16 economists in a Bloomberg News survey. The Bank of Korea cut borrowing costs by 3.25 percentage points between October and February, the most aggressive easing since it began setting a rate a decade ago.
“South Korea’s economy has been picking up relatively faster than other economies around the world,” said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul. “Still, that’s not to say the recovery is strong enough to justify an interest- rate increase yet.”
South Korea’s $929 billion economy expanded at the fastest pace in almost six years in the second quarter, leading a regional rebound with China and Singapore. Even so, the Finance Ministry warned this week the economy risks sliding into a “double-dip” recession if government stimulus measures are withdrawn too soon.
“In the coming months, the Korean economy is likely to maintain its positive growth on a quarter-on-quarter basis, helped by the improvement in the world economic environment and the rebuilding of inventories,” the Bank of Korea said in a statement in Seoul. It added that “a number of uncertainties surround the actual pace” of growth.
Stocks Rise
The Kospi stock index has surged 45 percent this year as investors bet the economy is past the worst. Fitch Ratings last week raised South Korea’s credit-rating outlook to “stable” from “negative,” citing the resilience of the nation’s economy and banks.
The Kospi gained 1.2 percent to 1,627.00 at 11:23 a.m. in Seoul, while the won was little changed.
Industrial production rose for a seventh consecutive month in July, climbing 2 percent from June, while manufacturers’ confidence rose to a 22-month high, earlier reports showed. Consumer sentiment climbed to the highest level in almost seven years in August.
Nomura International Ltd. last week raised its gross domestic product forecast to zero, from a 1 percent contraction, while Credit Suisse Group AG said the economy may grow 0.2 percent this year, avoiding a previously forecast contraction.
Borrowing Costs
Some economists say the central bank may have to raise rates soon to prevent inflation accelerating.
“The economic conditions have been better than expected and the central bank needs to stem inflationary expectations,” said Kwon Young Sun, an economist at Nomura in Hong Kong. Kwon said he expects a rate increase as early as November.
Low borrowing costs have fueled consumer credit, with South Korea’s bank lending to households expanding for a seventh straight month in August on demand for mortgages and as confidence rose. Loans to households climbed 3 trillion won ($2.4 billion) to 405.1 trillion won, the Bank of Korea said yesterday.
Aggregated household debt is at a record high relative to disposable income and the highest in Asia -- comparable to the proportions in the U.S. and Australia, according to Nomura.
The central bank said today it “will maintain an accommodative policy stance for the time being and do what is needed to bring about the continuation of the recent improving pattern of economic movements and financial market stabilization.”
The government also says it wants to maintain policies to support the economy until it’s confident the recovery is being led by business and consumers.
“A premature shift in the policy trend will pose the danger of putting the economy into a double dip by interrupting an economic recovery, while an excessive delay in the policy shift will spur a bubble in inflation and asset prices,” the Finance Ministry said in a Sept. 8 report. “There’s a need to maintain the expansionary macroeconomic policy trend until an economic recovery is more visible,” the ministry said.
To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
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